ii view: profit warning triggers Tate & Lyle share crash

First-half trading update to 30 September

• Now expects revenue for the period to be 3% to 4% lower
• Adjusted profit (EBITDA) now expected to be high-single digit percent lower

Guidance:

• Now expects full-year revenues to decline by low-single digit percent compared to the prior year, down from a previous at or below the medium-term range
• Now expects full-year EBITDA to decline by low-single digit percent compared to the prior year, down from previous growth which is ahead of revenue performance

Chief executive Nick Hampton said:

"We continue to make good progress delivering the benefits of the CP Kelco combination.  Our expanded portfolio and capabilities, particularly in mouthfeel, have created an enhanced and compelling customer offering.  

“In April, we started to operate as one combined business.  Since then, we have made real progress setting up the business for future growth, while also operating in a period of considerable economic volatility.”

Invest with ii: Open a Stocks & Shares ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA

ii round-up:

Food and beverage ingredient maker Tate & Lyle (LSE:TATE) today detailed a profit warning, triggered by a slowdown in customer demand particularly over the last two months.

Tate, which last year acquired US thickening ingredient maker CP Kelco for $1.8 billion (£1.3 billion), now expects first-half revenues to 30 September to be 3-4% lower, pushing adjusted profit (EBITDA) down by a high single digit percentage. Given that, management now expects full-year revenues and EBITDA to be down by a low single digit percentage. 

Shares in the FTSE 250 company tumbled by close to a tenth in UK trading having come into this latest news down by a third over the last year. They're now down at prices not seen since February 2010. Fellow food manufacturer and owner of Primark stores Associated British Foods (LSE:ABF) is down by a tenth over the past 12 months. The FTSE 250 index is up 5%.

Tate makes ingredients to reduce sugar, calories and fat and add fibre and protein, as well give texture and stability to food and drink. Categories in which they are used include beverages, dairy, bakery, snacks, soups, sauces, and dressings.  

Despite challenging market conditions, Tate does expect some improvement in financial performance during the final quarter of the current financial year, driven by the completion of the CP Kelco acquisition in April and subsequent cross selling and cost saving opportunities.  

Tate believes its fundamental growth drivers remain strong, with consumer demand for healthier and more nutritious food and drink continuing to grow.

First-half results are scheduled for 6 November.  

ii view:

Tracing it history back over 165 years, Tate today employs more than 5,000 people across 38 countries. Food and beverage solutions accounted for most sales during its last financial year to late March at 71%. That was followed by CP Kelco and sales of items such as pectin at 13%, sucralose sales at 11%, and other primary products the balance of 5%.  

For investors, soft customer demand and a likely using of existing ingredient stocks now sees annual revenue and profit hopes dragged lower. The takeover of CP Kelco is not guaranteed to be successful in boosting sales and reducing costs. Sucralose, a low-calorie sweetener, is subject to regulatory standards scrutiny, while currency headwinds can impact given significant overseas sales. 

• AB Foods shares severely punished on trading update
• The Income Investor: an appealing cyclical dividend stock
• ii view: could Zero be hero at drinks giant Diageo?

More favourably, the previous acquisition of Kelco is expected to generate increased profit margins for its products. Product diversity has been increased with geographical diversity including sales to more than 120 countries. Tate’s transformation to speciality ingredients was previously completed, with a focus on products to assist health now being pursued, while shareholder returns have in the past included share buybacks. 

In all, soft customer demand now generates significant caution. There will likely be investors happy to take the risk and go bargain hunting, given potential future benefits of its Kelco takeover and a forecast dividend yield of over 4%. That said, many others will prefer to wait for signs that Tate has turned a corner.

Positives: 

• Focus on healthy food ingredients
• Attractive dividend yield (not guaranteed)

Negatives:

• Uncertain economic outlook
• Potential currency headwinds

The average rating of stock market analysts:

Buy